Alcatel Us Something Positive

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.

It took a while, but telecoms equipment maker Alcatel-Lucent

(NYSE: ALU)
is finally in the black. More than half a decade after it was born from the merger of a French (Alcatel) and an American (Lucent) company, the unified entity posted its first annual net profit, and on paper it looks pretty good. Net came in at around $1.4 billion, which is an encouraging improvement over 2010's loss of $392 million, a much better figure than 2009's shortfall of $723 million, and a vastly superior number than the $7.3 billion red digits of 2008. Another market-pleasing bit of news was that the company generated $713 million in free cash flow in the last quarter of 2011. Revenue was down -- 2% to $20.2 billion from the previous year's $20.7 billion -- but this apparently didn't detract from the other achievements. ALU shares traded up nearly 13% the day the results were announced.

It's nice that the company has finally reached the profitability base camp, but it's scaling a tall mountain. It operates in a bitterly contested industry and faces big hurdles in its top two markets, America and Europe. The former is stuffed with well-funded, world-beating competitors like Cisco (NASDAQ: CSCO)

, which although it's had its hiccups over the years has been more consistently profitable than ALU. It's also got better margins -- in its most recently reported fiscal year, CSCO had a net margin of 15%, more than double Alcatel-Lucent's new 7.2%. Meanwhile in Europe, the landscape is also competitive, but the big business issue at the moment is the continent's stumbling economy. To be fair to ALU, compared to Euro-competitors it hasn't done badly. Nokia (NYSE: NOK), for example, was knocked from the top of the mountain some years ago and has struggled to climb back up, as indicated by its declining revenue (down more steeply than ALU at $1.8 billion year on year, to $56.9 billion in its most recently reported fiscal year).

Additionally, ALU's nice 2011 numbers are a bit of a smokescreen. They were helped by around $466 million in deferred American tax assets and a $446 million contribution from call-center infrastructure subsidiary Genesys, which was sold last year and so won't be included in future results. The hundreds of millions of dollars in freshly generated cash flow is good, but there are bills to pay. The company had around $5.5 billion in debt at the end of 3Q and less than $4 billion to service it. Compare this to big rival Broadcom (NASDAQ: BRCM), which had a comparable level of cash on the last day of 2011 but a much lower debt figure (of $1.2 billion).

Thanks to its most recent results, Alcatel-Lucent probably has thousands of new shareholders who are now believers in the company. This is an encouraging first step, but it has to keep the momentum and grow its business in a more fundamental way. Otherwise, the law of stock market gravity will soon apply -- what goes up must, sooner or later, come down. And in this business it tends to come down fast.

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Source: http://beta.fool.com/evolkman/2012/02/11/alcatel-us-something-positive/1913/

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